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 Fri Apr 14, 2023
KW Excerpt: Kaiser Watch April 14, 2023: West Vault Mining Inc (WVM-V)
    Publisher: Kaiser Research Online
    Author: Copyright 2023 John A. Kaiser

 
West Vault Mining Inc (WVM-V: $1.040)
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Kaiser Watch April 14, 2023: $2,000 still a ceiling or a new base for gold?
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(0:12:19): Which of your 2023 Favorites is the best proxy for gold?

West Vault Mining Inc was made a Good Speculative Value rated KRO Favorite on April 13, 2023 because it is an excellent leveraged proxy for the idea that $2,000 will soon become the base for gold rather than the ceiling it either bumps up against or briefly punches through before retreating to $1,700-$1,800. Last year I had Perpetua Gold Corp as an equivalent proxy for gold establishing a new real high gold price, but demoted it to a Bottom-Fish Spec Value rating at the end of 2022 because of two uncertainties: when will it get off the perpetual permitting treadmill and what will the feasibility study look like after it is updated to reflect the recent cost inflation and whatever changes needed to be made to secure mine approval. My own 20% escalation of CapEx and OpEx applied to the FS model indicated Stibnite will need $2,000 gold to clear key IRR (minimum 15%) and after-tax NPV (equal or higher than CapEx) development hurdles. Given a cycle of gold only temporarily breaching $2,000 Perpetua was no longer a good leveraged proxy for gold at the end of 2022. The permitting process has proceeded beyond the comment period and the stock has responded positively to gold's latest rally above $2,000, but an updated feasibility study is still missing. Furthermore, the large scale of Stibnite and the need for an autoclave to process the refractory ore limits the field of gold producers that might be interested in acquiring Perpetua and developing Stibite, which could hamper the stock's ability to serve as a proxy for gold once a permit is in hand and the feasibility study has been updated.

West Vault already has the key permits in place for developing the Hasbrouck project south of Tonopah in Nevada as two sequentially open pit mined and heap leached gold deposits, and in January 2023 the junior updated the PFS it had delivered in 2016. The reserve numbers are done in the imperial system (short tons and oz per ton) to which the United States clings even though there is much hand-wringing about the math and science competence of Americans which adoption of the metric system would improve. For those who have adapted to thinking about the mining sector in metric terms the total Hasbrouck proven and probable reserve of 44,023,000 tons at 0.017 opt gold is equivalent to 39,936,961 tonnes at 0.58 g/tonne. Tracker April 13, 2023, which is unrestricted because West Vault is a 2023 Favorite, provides an overview of the story and how to treat West Vault as a leveraged proxy for gold.

Since acquiring Hasbrouck in 2014 West Vault has invested $48 million in both acquisition and feasibility demonstration costs. At 60.2 million fully diluted and $1.02 stock price the 100% owned project is valued at $61 million, a mere 27% premium above sunk costs. Three key shareholders led by Peter Palmedo's Sun Valley Gold own 68% of the stock. Nobody seems to have made any money West Vault, which underwent a 10:1 rollback in 2020. The company's stated plan is to treat Hasbrouck as an ounce in the ground gold vault, spending no additional capital on exploration, nor acquiring other projects. The goal is to wait for a mid tier producer to acquire West Vault at fair value. With $4 million working capital West Vault can survive for 4-5 years doing nothing before needing to replenish the treasury with additional equity dilution. A problem with a junior like Perpetua is that the company repeatedly has to refinance, diluting the company at prices which reflect market skepticism that a permit will ever be granted. The absence of equity dilution risk makes West Vault a very good proxy for gold.

Based on the updated PFS which used $1,790/oz as a base case price the stock should be trading in the $1.50-$2.00 to represent fair speculative value, higher if you believe $2,000 is becoming the new base for gold with inflation not getting out of hand. The stock, however, is ignored by the market, perhaps because the 71,000 oz per year output with an 8 year mine life is seen as too small. However, West Vault has left resource expansion potential within the existing property open, and there may be exploration potential to the east which a future acquiror of Hasbrouck may be able to consolidate. The market's unwillingness to assign a higher value to West Vault has prompted the junior to mount a normal course issuer bid to buy up to 2.9 million shares per year. I am not a big fan of juniors using scarce capital to buy their own stock while claiming it is under-valued; that money is better spent on marketing the story to a broader audience.

I have dumped the PFS data into my own DCF model which emulates the ore mining schedule and depreciation-depletion schedules as closely as possible. The result at the base case prices is about 10% lower than the PFS IRR and NPV figures, possibly because I am not including tax pools related to the sunk cost. But it is close enough to serve as a tool to see what happens at different gold prices while keeping the silver base case price of $22.50/oz constant. One chart shows how after-tax NPV in USD behaves at both 5% and 10% discount rates all the way to $3,000 per oz. Using higher gold prices is not worth the bother because circumstances that allow such a price increase likely involve significant cost inflation, which makes a DCF model that keeps costs fixed an inappropriate tool. The second chart converts the USD NPV into CAD and presents it on a per fully diluted share basis. These figures would decline if the Canadian dollar soars against the US dollar, which we did see in 2007 and 2011 when CAD achieved parity with USD and even was worth more for a short period. If the Republican Party refuses to increase the debt ceiling in 2023 this might happen again, though the decline of the USD against CAD will likely be more than offset by a substantial surge in the price of gold. The key reason to use these charts to figure out where West Vault could trade is the fact that fully diluted is unlikely to change over the next few years.

It is important to keep in mind that under the rational speculation model a project at the permitting-feasibility stage should be priced at 50%-75% of its indicated after tax NPV. However, if the metal is in an uptrend which the market believes is establishing a new pricing reality, such as we witnessed with base metals during the China super cycle of the 2000s, the market will not stick to rational valuation metrics. West Vault offers Good Speculative Value because the market does not believe $2,000 will become the new base for gold rather than its ceiling.


Maps showing location of West Vault's Hasbrouck Project

Maps showing Expansion Potential at Three Hills and Hasbrouck Deposits

Hasbrouck AT NPV Sensitivity to Gold Price

Hasbrouck CAD AT NPV per share Sensitivity to Gold Price

 
 

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